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Thursday, November 14, 2013

Navis Capital and Malaysia's Alliance Cosmetics

Alliance Cosmetics was already the dominant force in Malaysian make-up market when it was acquired by Navis Capital Partners in 2010. The next step was to use this experience to break into Indonesia
In the world of color cosmetics skin tone is important. A shade of eye shadow that is popular in Europe might be completely different to what Indian or North Asian consumers prefer. Local knowledge is therefore vital when taking a cosmetics company across borders and trying to open up new markets. Price is just one of many factors. Climate, diet and even religion can play a role in a woman's choice of make-up.
These considerations underpinned Alliance Cosmetics Group's bold decision to go toe-to-toe with the likes of Maybelline and L'Oreal in Southeast Asia. The Malaysian company recognized there was a niche for a local brand in a market previously dominated by foreign players.
SilkyGirl duly launched in 2005 as a range of affordable cosmetics that answered the needs of Malaysian women. Alliance already had the network it needed to get the brand to the market quickly, having been a distributor for brands including Revlon and Wet n' Wild in Malaysia, Singapore and Brunei. Within two years, SilkyGirl was the market leader in Malaysia's $96 million color cosmetics market by sales volume and only trailed Avon and Maybelline in terms of sales value.
The appeal was clear for Navis Capital. Following its successful $90 million exit from Malaysian diaper manufacturer Drypers in 2004, at an IRR in excess of 100%, the private equity firm was eager to find its next consumer success story. Alliance emerged as the standout contender following an internal search of local brands in 2010.
"There are not many areas where you see global brands alongside indigenous Southeast Asian brands and the local brand has a higher market share," says Rodney Muse, co-managing partner at Navis. "It makes for a pretty interesting story. In addition to that, it was a well-run business with a systematic approach to building out the product range and improving the consumer experience."
The timing was ideal as Alliance founder Thiam Hock Tan, who had built the company up from the ground and was looking for a way to de-risk the business, build a nest egg for his family and eventually step down as CEO.
Navis agreed to acquire an 80% stake in Alliance for MYR40 million ($12 million) and set about forming a strategy for the company's expansion.
With a dominant position in Malaysia and a well-established foothold in Singapore and Brunei, SilkyGirl had made its first steps into Indonesia. However, Alliance had yet to make an aggressive play for a share of the country's $380 million color cosmetics market.
"Indonesia is a really large market and it jumped out straight away as a good strategy for the company," reflects Muse, noting that similarities in skin tone, culture and consumer tastes meant there were numerous synergies that could ease the SilkyGirl's passage into the market. "We thought that if we could succeed in Malaysia it was possible we could contemplate an entry into Indonesia."
The chosen man
With Tan looking to step down, the first challenge was to find a suitable replacement to guide the company through its Indonesia campaign. "Tan is a very charismatic, larger-than-life guy and there is always a danger when a guy like that steps away the business might falter," says Muse. "So we started to recruit for someone to take over before we even did the investment."
The man chosen to fill Tan's shoes was Chee Eng Ng. A native Malaysian, Ng had spent more than eight years with global cosmetics giant L'Oreal. His experience of the Asian market was broad, having worked as general manager of the company's consumer division in Taiwan from 2005 until 2008 before returning to Malaysia to serve as manager of the company's salon business.
Ng and Tan had known one another for many years and it was the Alliance founder who made the initial advance, explaining that he was bringing in financial investors and wanted to recruit a COO. It proved to be a good fit with Ng eventually assuming the CEO role in 2012 as Tan moved up to take a seat on the board.
The entry into Indonesia was not without its challenges. Muse describes the early days of as being something of a "two steps forward some step back" process. The brand registration process alone had been fraught with logistical complications and then came the issue of distributing in a country where the 238 million-strong population is spread over an archipelago of some 17,000 islands.
"As you can imagine, Indonesia is a place where things are distributed in very circuitous and funny ways," says Muse. "And finally you get to the bigger challenge of how you become relevant to many tens of millions of people in such a far flung country."
When a consumer brand goes overseas, the typical low-risk approach is to set up a local company to handle distribution nationwide. However, it is also low reward because the distributor gets a large slice of the revenues. Instead, Alliance decided to set up its own company in Indonesia to import the product and then enlisted regional distributors who would in turn utilize sub-distributors. In this way, they could ensure that SilkyGirl was spread as far and wide as possible.
With a distribution strategy in place, Alliance's next step was to carve out a place for SilkyGirl in Indonesia's crowded cosmetics space. Broadly speaking, the market is split between sophisticated global players and a multitude of tiny local brands, many of which are not particularly well run. "It creates a messy landscape," says Muse. "What Silky Girl was trying to do was position itself as part of that multinational set but with local flair - an aspirational purchase but also a value purchase."
Carving a niche
With this in a mind, a two-pronged approach was devised, aimed at getting SilkyGirl into the flagship retailers while ensuring the brand was also sold in many smaller outlets to ensure greater market penetration.
Alliance formed a relationship with Indonesia department store chain Matahari, Indonesia's fourth-largest retailer. This gave SilkyGirl passage into 112 stores nationwide, but the real battle was fought in Jakarta, a crucial market if the brand was to establish itself a credible player in consumers' eyes. The company also engaged in what Ng describes as "second site activities" whereby SilkyGirl had a stall in the department store but also set up an additional promotional site for brand activities such as product sampling and offering beauty advice.
The second part of the strategy was to get SilkyGirl into local convenience store chain Indomaret. Much like a 7-Eleven, these stores are too small to provide the full range of products but instead sold pre-packed sets of Silky Girl's most popular products that could be put on display by the counter. "A department store like Matahari is very important for brand image, getting traction and running consumer trials," says Ng. "But we needed chains like Indomaret, which has around 5,000 stores, to gain that deep brand penetration."
To support this, Alliance also ran a national television campaign advertising Silky Girl's availability at Indomaret. It also used its distribution network to deliver products to small family-run general stores dotted around the archipelago. In the department stores at least, the strategy is gradually starting to pay off. Out of around 50 competing color cosmetic brands sold at Matahari stores, SilkyGirl currently ranks around 15th.
There were two other considerations that were vital in targeting the Indonesian market. First, SilkyGirl had to meet the requirements of the country's majority Muslim population. "It is really well suited to this market," explains Muse. "All our products are halal-certified, and don't include a pork base. You would be surprised how many cosmetics products around the world actually do include this." In addition to its make-up products, SilkyGirl also launched a halal-certified range of skincare products including moisturizers and skin creams.
Second, Alliance had to come up with a pricing model that worked. Given that Indonesian consumers have less disposable income than their Malaysian counterparts, Silky Girl had to adjust prices to maintain its value appeal. Despite this, Alliance was still able to get its products from the same factories and suppliers as the major cosmetics brands. Its eye-liners pencils, for example, are produced in Germany by Schwan- Stabilo, the same firm that supplies Estee Lauder and Lancome.
"People ask us why our prices are so attractive," says Ng. "Generally my response is that they should be asking why the other brands are so expensive. It is all about marketing."
SilkyGirl's success can also be traced back to a delivering a successful targeted marketing campaign within budget. In addition to building a profile in Indonesia through relationships with chains such as Matahari and Indomaret, there was a concerted effort to revitalize the brand image. "We did a study of consumers in Malaysia and Singapore, which is our core market, indentifying product gaps vis-à-vis what the consumers are after," says Ng. "At the same time we started repackaging our products and have spent the last 18 months building up new merchandise. We thought the brand needed a refresh."
Well-known faces
Another important ingredient in the marketing strategy was brand ambassadors. Thanks to the synergies in Indo-Malay tastes with regards to fashion, entertainment and music, Alliance was able to bring together a small group of celebrity ambassadors that had appeal across all its target markets.
"Previously we had been more Malaysia and Singapore-centric, but now we are more sensitive to the needs of the other market," says Ng, who describes Silky Girl consumers as being part of the "Generation Y" group aged between 16 and 30. Alliance therefore sought out actresses and singers including Indonesian teen pop icon Gita Gutawa , Malaysian singer Stacey Angie and Singaporean actress Felicity Chin. All three appear feature on the SilkyGirl website as spokespersons for products, each offering their own beauty tips.
Over the last 18 months Alliance has seen its business in Indonesia grow organically, with a sales run rate of $2 million per annum now growing 15% month-on-month. Group EBITDA currently stands at around $15 million.
Looking ahead Muse says Navis' likely exit will be through a sale to a strategic investor that values both Alliance's entrenched market position in Malaysia and Singapore, along with the growth potential of Indonesia.
Yet there is still plenty of scope to take the company elsewhere in Southeast Asia. "We have plans to move to the Philippines and Vietnam down the road," says Ng. "One of the core strengths we have with color cosmetics is that shades are important. Malay, Thai, Filipina - all these skin tones go well."

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